International Journal of Trend in Scientific
Research and Development (IJTSRD)
International Open Access Journal
ISSN No: 2456 - 6470 | www.ijtsrd.com | Volume - 2 | Issue – 5
Unconscionable Contract
Bhanu Prakash Singh Markam
B.B.A.,
A., LL.B (Hons), Indore Institute of Law
Indore, Madhya Pradesh, India
Unconscionable
Courts
ourts use the term “unconscionable” to describe
conduct that is either unjust or one-sided
sided to benefit
one party more than the other. In contract law, an
unconscionable contract is one that no reasonable
person would enter into without some very
compelling reason. Those who do end up entering into
unconscionable contracts tend to be poorly eeducated,
living in poverty, or have been unable to find a faire
fairer
agreement elsewhere.
Definition of Unconscionable
Noun
Conduct that is unfair or one-sided
sided so as to provide
more of a benefit to one party over another.
Origin
1555-1565
What is Unconscionability
Unconscionability is a term in contract law that is
used to describe the terms of a contract that are so
severely unfair or one-sided
sided that no reasonable person
would enter into such a contract. Because of how
unreasonable an unconscionable contract is, the
contract is considered by law to be unenforceable.
This is because it would not be fair for the person who
drafted the contract to benefit from his deliberate
deception. It would also be equally unfair not to let
the other party out of a contract that was drafted for
the purpose of deceiving him.
For example, unconscionable language consists of
terms or phrases that the average person would not
understand. This lack of understanding would then be
glossed over by the perpetrator in his attempt to have
the other
ther party sign a contract that he would not have
agreed to, had he more fully understood what he was
signing.
A contract of sale to purchase a home wherein the real
estate agent inserted hidden fees or other shady terms
that are written in “legalese” would
woul be an example of
unconscionable conduct. Without seeking the
assistance of an attorney, the average person may not
understand what he is agreeing to, but may agree to it
anyway due to a lack of education on the subject, or
the belief that he will not find
d a better deal elsewhere.
Unconscionable Conduct
Unconscionable conduct is typically found in cases
that involve fraud or deception. This is because one
party deliberately misrepresents the facts to deprive
someone else of something valuable, such as money
or property. In effect, the person exhibiting the
unconscionable conduct is stealing from, or otherwise
taking advantage of, the other person. Unconscionable
conduct can be punished as either a criminal fraud, or
with a civil action. A contract is more
mo likely to be
found to be unconscionable if it contains both unfair
bargaining practices and one-sided
sided terms.
Unconscionable Contract
A contract is considered unconscionable when the
person drafting the contract was acting with
unconscionable conduct at the time the contract was
being drafted. The fact that events may transpire later
on that provide one party with more of an extreme
benefit than the other is irrelevant, and do not make
for an unconscionable contract. Unconscionability
must exist at the time
me the contract is drafted in order
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International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
for the contract to be declared void, and for the drafter
to be punished accordingly.
Three
Elements
Unconscionability:
There are no set guidelines insofar as determining
whether a contract is unconscionable. It is left up to
the discretion of the judge or jury that is presiding
over the case. An unconscionable contract is one that
would be a mockery of the judicial system if the court
were to let it stand. Damages are not typically
awarded upon a court’s finding of a contract to be
unconscionable. However, there are other remedies
available at law that a court can pursue.
i. Unequal bargaining power (usually consumer, not
commercial)
For instance, the court may refuse to enforce an
unconscionable contract, arguing that the party who
was unfairly treated was misled, lacked the
information necessary to make such a decision, or
signed under duress. Alternatively, the court may
refuse to enforce only the clause that makes the
contract unconscionable and uphold the rest.
Examples:
Procedural Unconscionability
Procedural unconscionability is a term used to
describe the very unfairness that makes a contract an
unconscionable one. Procedural unconscionability
refers to the disadvantage suffered by the
misinformed party upon consenting, against what
would have been his better judgment, to extremely
unfair terms. There are two main factors that make up
procedural unconscionability: oppression and
surprise. The oppression comes from one party’s
overwhelming power over the other that enables him
to take advantage of the other party. Surprise exists
when the misinformed party supposedly agrees to
what are, in actuality, hidden terms designed to
defraud him.
Substantive Unconscionability
Substantive unconscionability is a term used to
describe the terms of a contract in that the terms, or
“substance” of the contract, are unfair. Substantive
unconscionability is found when the terms of a
contract are oppressive or cruel to the extreme.
Substantive unconscionability is found in cases
wherein the terms of the contract themselves would
raise a red flag as to the contract being suspect,
provided the person reading those terms knew what to
look for.
Necessary
to
Prove
ii. Dictation of terms of contract by stronger party –
an Adhesion Contract
(stuck with terms)
iii. Terms manifestly (obviously) unfair or oppressive
i. Williams vs. Walker Thomas: a series of contracts,
they say if you default on anything, they can take
everything, even if it was already paid off
ii. Campbell’s Soup case: gave Campbell’s the right
to reject the Carrots for any reason, and had a no-sale
clause if they were rejected.
1. If delivered, Campbell’s can reject even if perfect.
If rejected, cannot go sell elsewhere either.
Campbell’s sued and lost be unconscionable.
Unconscionable Example Involving a Trucking
Business
An example of unconscionable conduct can be found
in a case wherein one trucker helped another trucker
with a start-up business, then failed to receive the
compensation he was initially promised. Randall
Lemke owned a trucking business in Wisconsin that
ultimately went bankrupt. Thereafter, in the spring of
1992, businessman George Arrowood approached
Lemke for help in starting his own trucking business:
M&G Trucking, Inc. Lemke agreed on the condition
that he would receive half of the company’s profits
for three years.
Lemke then contacted several of his former customers
and asked them to consider hiring M&G Trucking. He
also contacted several of his former employees and
asked if they would consider working for M&G
Trucking. He obtained all of the necessary licenses,
permits, and insurance to incorporate M&G Trucking.
He also installed a computer system that came with a
database of 300 to 500 potential customers for the
company and trained Arrowood on how to use the
system. Lemke leased to Arrowood the computers,
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International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
software, phones, and other office furniture from his
old business at a cost of $200 monthly.
After Lemke had invested about five weeks into this
project, he and Arrowood drafted up and entered into
a written contract that would “clarify and document”
their initial agreement. The contract read, in part:
“[Lemke] shall provide assistance in the form of
“startup labor” to M&G Trucking Ltd., for a period of
5 weeks without pay, commencing on April 9, 1992
and extending through May 15, 1992. [Lemke] shall
be paid in the amount of $8.00/hour for each hour of
work put in for [M&G Trucking] following the startup
period.
him that, while the purchase did, in fact, void the
rental part of their agreement, he still expected to be
paid half the profits for three years as the two had
initially agreed.
Ultimately, Arrowood never paid to Lemke any of the
profits he earned from M&G Trucking, nor any other
compensation for Lemke’s start-up help. Further,
neither party had ever terminated the contract in
writing. Lemke then sued Arrowood in 1996 for
monetary damages in the amount of either $200 per
month, or half of M&G Trucking’s profits for the six
years that followed the signing of the contract.
Decision after Trial and Appeal
[Lemke] shall be paid an additional amount equal to
1/2 of the net profits arising out of the trucking
operation known as M&G Trucking Ltd…Payment
based on net profits shall be paid at least yearly within
one month of the end of the year; however, net profits
shall never be less than $400.00 per month to [Lemke]
under this provision for use of the equipment set forth
in paragraph 6.
The case went to trial, whereupon Arrowood argued
that Lemke had breached the contract in his seizing of
office equipment. The trial court dismissed the matter,
finding that the contract was unconscionable and that
there was no evidence that the court could use to
calculate damages. The court also found that the
contract did not require Lemke to do anything in
particular, so Arrowood’s argument was moot.
This agreement shall be effective initially for a period
of three years starting from the effective date. This
agreement shall automatically renew on identical
terms of compensation for a similar period unless
specifically revoked by either [Lemke] or
[Arrowhead] within 6 months, but not less than 60
days, from the end of the agreement.
The matter was appealed to the Court of Appeals for
the State of Wisconsin. The Court of Appeals
ultimately held that the trial court’s decision was to be
reversed, and that Lemke was entitled to $77,462.35,
plus costs, in damages. Because Lemke had not
provided enough evidence to the Court that the Court
could use to calculate what he was rightly owed, the
Court came to this number by adding up everything
he was owed by analyzing the profits made by M&G
Trucking over the period in question.
[Lemke] shall lease to [Arrowood], as part of this
contract, the computer equipment and software, office
furnishings, and phone system currently located at
1220 Depot St., Manawa, WI. For income tax
purposes, the payment of 1/2 the profits to [Lemke]
shall be designated as rental payments for the use of
the above mentioned equipment. [Arrowood] is not
authorized to copy any of the software or programs,
without the consent of [Lemke]. This agreement may
be voided at any time by the mutual consent, in
writing of both [Arrowood] and [Lemke].”
In the fall of that year, Lemke asked Arrowood to buy
the equipment that he had been leasing to M&G
Trucking. Arrowood paid Lemke $5,200 to buy
everything but the computers, which Lemke then
repossessed. Arrowood attempted to clarify with
Lemke whether his purchase of the equipment
effectively ended their initial contract. Lemke told
The Court also justified its reasoning insofar as not
declaring the contract procedurally or substantively
unconscionable. Specifically, the Court wrote:
“The record does not establish the contract was
substantively unconscionable. First of all, Lemke
performed approximately 200 unpaid hours of work
for Arrowood…But Lemke gave Arrowood more than
the benefit of his time. He also gave him the benefit of
his expertise and his prior business contacts. In
addition, the arrangement allowed Arrowood to get up
and running without an outlay of capital which he
apparently did not have. In exchange, Arrowood
promised to pay at least $400 a month (including
$200 per month toward the lease of office equipment),
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International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
or $14,400 over a period of three years. This was not
so unreasonable as to be viewed as profoundly unjust.
…The fact that Lemke provided only limited services
after the execution of the contract does not make the
automatic extension provision unconscionable,
because either party could cancel the extension within
six months but not less than sixty days from the end
of the first three-year term, and the parties could
mutually agree to terminate the contract at any time.
The fact that Arrowood may have failed to exercise
his right to cancel the extension after it became clear
that Lemke was providing no further benefit to him
does not make the contract itself unconscionable.
Because we conclude the contract was not
substantively unconscionable, we need not consider
whether there was any procedural unconscionability
in the parties’ positions.”
Article 2-302. Unconscionable contract or Term.
Under UNIFORM COMMERCIAL CODE
(1) If the court as a matter of law finds the contract or
any term of the contract to have been unconscionable
at the time it was made the court may refuse to
enforce the contract, or it may enforce the remainder
of the contract without the unconscionable term, or it
may so limit the application of any unconscionable
term as to avoid any unconscionable result.
(2) If it is claimed or appears to the court that the
contract or any term thereof may be unconscionable
the parties shall be afforded a reasonable opportunity
to present evidence as to its commercial setting,
purpose, and effect to aid the court in making the
determination
Related Legal Terms and Issues
Contract – An agreement between two or more
parties in which a promise is made to do or provide
something in return for a valuable benefit.
Damages – A monetary award in compensation for a
financial loss, loss of or damage to personal or real
property, or an injury.
Duress – Threats, intimidation, or bullying intended
to force someone to do something.
Fraud – A false representation of fact, whether by
words, conduct, or concealment, intended to deceive
another.
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